Financial Summary Report: The Lemonade Stand Business … Business Plan

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Financial Summary Report: The Lemonade Stand Business

Financial Summary Report: Juicy Lemonade Stand, Season One and Two

The Lemonade stand business is a viable business opportunity particularly because it is relatively easy to set up and it requires very little capital to start. Juicy Lemonade Stand's primary business is the sale of cold lemonade to customers. Its popularity can be attributed to its cheap prices and numerous word of mouth recommendations. Customers get timely service and they also get fresh lemonades - free of additives and artificial sweeteners, as well as colors. According to Fridson and Alvarez (2011), a business's financial statements are essential because they help measure its productivity and financial condition accurately. Juicy Lemonade has been in operation for two seasons and an analysis of its financial statements will provide a lot of insight about its performance. It will also highlight its strengths and weaknesses to allow for adequate comparisons of its operations with that of its competitors, and to identify the areas that need to be improved in order to increase its profitability in future. In particular, Taco Bell, a subsidiary of YUM! Brands will be used in comparison because it is a quick service restaurant that specializes in fruit smoothies as well as burritos and tacos. It is well-known for its Frozen Strawberry Lemonade and recently, it also launched the Snapple Lemonade Freeze. This text presents a comparison of Juicy Lemonade Stand's performance for the two seasons it has been in operation and also compares its performance with that of YUM!, one of its major competitors.

The income statements for season one and two

Table 1

Income Statement for Seasons 1 and 2

Season_1

Season_2

Revenue

$204.2

$331.2

Expenses

$78.9

$61.13

Net Income

$125.3

$270.1

The income statement of Juicy Lemonade stand reveals that there was a substantial increase in its net income in the second season. The net income increased by $144.8 (53.6%) which is an indication that the business is performing well. Juicy Lemonade was able to increase its revenues by 38.3% and at the same time reduce its expenditure by 22.5%, which saw the resultant period for the second season increase because there were more inflows than outflows. However, with a monthly net income of $1,051, Taco Bell's performance exceeds that of Juicy Lemonade by far (Bloomberg, 2015). This is particularly because Taco Bell has a variety of income producing streams while Juicy Lemonade only specializes on lemonade. Juicy should also consider diversifying its operations to increase its competitive advantage and also increase its revenue. Although Taco Bell may be bigger and more established, it is still at a disadvantage because much of its revenue goes towards paying for its numerous expenses. Therefore, Juicy Lemonade should ensure that in future seasons, its expenditure is minimal so as to try and maximize its profits.

The balance sheets for season one and two

Table 2

Combined Balance Sheet for Seasons 1 and 2 Ending

Assets

Season_1

Season_2

Cash

$204.2

$331.2

Inventories

$1.02

$0.80

Equipment

$10

$12.1

Total Assets

$215.22

$344.1

Liabilities

Accounts Payable

$40.00

$35.50

Total Liabilities

$40.00

$35.50

Equity

Owner, Capital

30.00

38

Retained Earnings

Total Equity

$155.3

$288.3

Total Equity & Liabilities

$195.30

$323.3

The balance sheet reveals the businesses assets, liabilities and owners' equity (Drake and Fabozzi, 2013). Although there was an increase in assets from the first to the second season, the liabilities decreased, which signifies that in the second season, Juicy Lemonade's asset generated more revenue for the business than in the first. The decrease in liabilities in the second season also signifies that the business was able to pay off the creditors in time, which is good for the business. The current assets of juicy are more than the current liabilities, an indication that in both seasons, Juicy Lemonade was liquid and it was able to meet its cash obligations as they came. However, it seems that Juicy Lemonade is holding too much of its cash as assets. It would be more profitable to utilize it in other ways

According to Fridson and Alvarez (2011), the net worth of a business provides useful information on the risk involved in providing a loan. Juicy Lemonade's balance sheet reveals it is a stable company because most of its financing comes from retained earnings. It does not depend on debt, which would have put investors off. YUM has long-term debt totaling to $3,077 and only $1,737 worth of retained earnings. Compared to Juicy, its high level of debt will make lenders term it as risky. Juicy Lemonade has better chance of securing credit because its net worth is large, relative to its assets, which signifies that a loan is well secured and there is smaller chance of loss

Financial ratios for season one and two

Table 3

Financial Report for Seasons 1 and 2

Season_1

Season_2

ROE

80%

43%

ROA

63%

38%

Profit Margin

67%

61.60%

Inventory Turnover

75.54

81.04

Asset Turnover

0.99

0.921

Current Ratio

1.94

5.24

Cash Ratio

3.9

7.2

Debt-Equity Ratio

0.242

0.12

The return on equity (ROE) measures the profit that is earned for every dollar invested in the business. It is calculated by dividing the net income for the period with the shareholder's equity. According to Leach (2010) the higher the ROE, the better a business is for investors. Season one was the most profitable for Juicy Lemonade because the investors saw an 80% return on their investments, as compared to 43% in the second season. In other words, every dollar of common shareholder equity earned the shareholders $0.8 in the first season. Bloomberg (2015) indicates that YUM's ROE was 52.62% ($1,051 / $1,997.34) at the end of the financial period. This signifies that Juicy Lemonade needs to find innovative ways to increase its profitability for it to reverse the lower ROE it had in the second season. If this is not done, investors may view YUM as the better investment.

Compared to YUM's return on assets (ROA) of 14.98, Juicy Lemonade had a ROA of 63% in the first season and 38% in the second season. This indicates that in both seasons, Juicy Lemonade's assets were better at generating the business' profits than those of YUM. The first season of Juicy Lemonade's operations was also the best in terms of profitability, as indicated by the higher profit margin of 67%. However, despite the drop to 61.60% in the second season, it was still more profitable than YUM, which had a profit margin of 25.88% ($13,279 / $51,309). Leach (2010) states that the gross profit margin shows whether a company applies the correct pricing structure. It seems that Juicy Lemonade's cost of sales are directly related to its revenues, while YUM sells its products for less than the amount incurred in making them.

The inventory turnover is calculated by dividing the total number of sales in a period by the inventory (Leach, 2010). It is supposed to show how much a company stocked and replaced. YUM's inventory turnover of 33.1% ($13,279 / $40,117.8) pales in comparison to that of Juicy Lemonade's, 75.54% in season one and 81.04% in season two. This is healthy for Juicy Lemonade as there are no stock outs and there is no inventory wasted due to spoilages that arise from overstocking.

Another point of comparison is the asset turnover ratio. It shows the amount of revenues that are generated per every dollar of assets (Bull, 2008). In both seasons, Juicy Lemonade's asset turnover ratio averaged at 0.96%. Bloomberg (2015) shows YUM's asset turnover ratio was 1.6% ($13,279/$8,345). This indicates that compared to YUM, Juicy Lemonade is not deploying its assets as efficiently as it should since its assets do not generate enough revenue. Another important ratio is the current ratio, a liquidity ratio that is used to calculate a company's ability to pay its obligations. It divides the current assets with the current liabilities. The current ratio for Juicy Lemonade's first season was 1.94 and that of the second was 5.24 and according to Bloomberg (2015), YUM's current ratio was 0.7($1,646/$2,411). This reveals that Juicy Lemonade is in a better position to pay its short-term obligations. The cash ratio of 5.24 in the second season is also higher than that of YUM, 0.4, which also indicates that Juicy is more liquid.

It is also important to compare the debt to equity ratio to measure the long-term solvency of the two firms. Juicy Lemonades financial statement shows this ratio declined significantly from the first season to the second with a drop from 0.242 to 0.12. The debt to equity ratio for YUM at the end of the period stands at 0.207($6,732/$32,521). This shows that YUM finances more with debt as compared to Juicy, as at the end of the period. Juicy Lemonade should maintain this low debt to equity ratio because too much debt financing may be translated to mean the company is risky. Furthermore, debt finance comes with too many conditions from lenders, which may be detrimental to the business.

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